Bachelor's thesis (Turku University of Applied Sciences) Degree Program in Business Management

party’s operations? 
Further discussed observations of empirical research presented in Chapter 8 
will show us that the structure of investment portfolios of large and small 
financial institutions differs in many respects.
While large financial intermediaries are more encouraged to invest in the share 
capital of foreign companies and less into the government securities (as they 
are less risky, but less profitable as well), investment activities of smaller banks 
revolve around domestic government and corporate issued financial 
instruments. 
6.5 Investment strategies in commercial banking 
A universal rule of investment theory has been formulated in the course of 
investment activities of various participants of the financial markets: the rate of 
return (profit) from an investment in securities is always directly proportional to 
the amount of risk that a certain investor is prepared to face in order to achieve 
greater profitability (Mishkin, 2009, p. 29; Casu, Girardone and Molyneux, 2006, 
p. 259). 
Thus, it might be possible to mention that any commercial bank carries out 
investment policies usually aimed at finding the right balance between 
profitability, liquidity and risk.
Therefore, major factors defining investment strategies of a commercial bank 
are not just concerned with achieving better profits and maintaining liquidity at 
the same time, rather with the possibility to shift the boundaries of liquidity for 
the sake of profits or, on the contrary, invest in liquid assets in the short-term in 
order to increase the levels of liquidity Casu, Girardone and Molyneux, 2006, p. 
228).

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
There is always a question of how to distribute selected securities over a certain 
period of time, in other words: how should maturity dates of to-be-acquired 
financial assets correlate with investment portfolio in general and other financial 
assets in particular?
As has been accurately outlined by Fredric Mishkin, professor of Banking and 
Financial Institutions at Columbia University, the striking difference between the 
features of short-and long-term investments reveals itself in the following trend: 
while not being as liable to the fluctuations of prices as a result of changes in 
interest-rates, short-term securities are considered to be a better source of 
liquidity (and not profitability), since it is generally easier to trade them at a 
given point in time (Mishkin, 2009, p.29). 
It is common to diversify among two alternative strategies that concern this 
problem: both of them possess an exclusive set of positive and negative 
features. Guiding investment decisions of commercial banks are often 
distinguished as a combination of passive and active strategies (Lavrushina, 
2007). 
6.5.1 Passive Strategy 
In order to create a scenario of rational investment behaviour and minimize 
negative influences of market risks, commercial banks can adopt certain 
strategies when it comes to investing in bonds. Most of these strategies have 
one thing in common 
– they usually focus on the time factor of the investment, 
in other words, deal with a combined investment portfolio that includes financial 
instruments with specifically chosen maturity terms. 
“Ladder” investment strategy is usually considered to be one of the most 
popular approaches to banking investment. The core of this strategy is 
formulated by the principle of adopting a special time frame and then investing 
equal amounts of money in certain financial assets over a defined time period 
(Piper Jaffray, 2005).

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50 
TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
Even though this strategy does not focus on profit maximization, it compensates 
the lack of this feature by greatly reducing the deviations of income levels 
during a specific time frame and, therefore, combining the benefits of liquid and 
high-yield securities (Piper Jaffray, 2005). Moreover, ordinarily, this approach 
provides flexibility to investment portfolios of commercial banks.
While pursuing for this strategy, commercial banks distribute their capital 
between various securities in such a manner that within the next several years a